I am the founder and CEO of CircleUp, an accredited investor crowdfunding platform focused on consumer and retail companies. Before I started CircleUp, I worked in consumer-focused private equity at TSG Consumer Partners and Encore Consumer Capital. My experience in private equity exposed me to many great consumer and retail businesses that were too small to obtain funding through the traditional private equity channels. I created CircleUp to open up these investment opportunities to more investors, helping the best of these businesses gain access to capital while lowering the cost of investment for individual and small institutional investors. I received my MBA from Stanford and BA from Duke. I also hold Series 24, 63, and 82 licenses. You can connect with me through http://www.facebook.com/CircleUp.

Crowdfunding Predictions for 2013

2012 was quite a year for the crowdfunding industry. In April, President Obama signed the JOBS Act into law, which will open up equity-based crowdfunding for unaccredited investors. In May, the Pebble E-Paper Watch set a crowdfunding record and gained national media headlines, raising over $10 million on donation-based crowdfunding site Kickstarter. Research firm Massolution estimates the crowdfunding industry (equity + donation + lending +reward crowdfunding) will grow from $1.5 billion in 2011 to $2.8 billion in 2012.

So if 2012 was the year that put “crowdfunding” into America’s collective lexicon, what will 2013 hold for the nascent industry? Here arethree predictions for crowdfunding in 2013:

The implementation of the JOBS Act will not lead to an explosion in crowdfunding in 2013.Sorry. Currently, a form of equity-based crowdfunding by accredited investors is permitted; what the JOBS Act will do once the SEC finalizes the rules, is to create a new way for unaccredited investors to participate in equity-based crowdfunding as well. However, I think many prognosticators will be in for a surprise when crowdfunding by non-accredited investors turns out to be much smaller than expected in 2013.

Why will it be smaller? 1) timing – rule implementation will take longer than everyone expects; 2) adjustment period- it will take time for all participants (companies, investors, lawyers, platforms, etc) to understand and adapt to the rules in an efficient way; 3) fewer (good) companies will care – raising capital for most companies is a challenge, but that doesn’t mean those that struggle today will want to comply with the many regulations and challenges equity crowdfunding for non-accredited investors will impose. I have talked often in this column about adverse selection – and I worry the quality of the companies that chose to fundraise through the new crowdfunding rules, at least initially, will put a damper on the market as investors remain rightfully cautious.

Donation based crowdfunding sites will differentiate or die. While we are still in the very early innings of crowdfunding, Kickstarter has jumped out to a commanding lead among donation based crowdfunding portals. Since Kickstarter’s inception, campaigns on the site have successfully raised $371 million, and the distance between Kickstarter and the field keeps widening in the US (at least). While Kickstarter can be successful as the Amazon.com of crowdfunding, other donation sites will need to differentiate and own a particular niche to stay relevant, similar to what happened in the social media, flash sale site and countless other web industries. Differentiation will mean improving upon the status quo for all of its users.

Angel Groups Will Embrace Equity Crowdfunding. The facts are simple. Online platforms, including CircleUp, provide an improved company and investor experience. Why would you want to sit through 3-5 hour long meetings to see just a few pitches? You can ask questions and be a part of a community, while seeing relevant dealflow, by joining a respected equity-based crowdfunding platform. Angel groups will remain strong, as the best groups provide education, support and tools for members that go beyond just deal flow, but I expect more groups to seek out partnerships with top platforms to improve the experience for both sides. One bonus prediction? Crowdfunding will again be a dominant topic at this April’s Angel Capital Association’s meeting inSan Francisco, as group manager and the Angels themselves find the best way to capitalize on the growing movement. Platforms should embrace the conversation, and find a way to bring the best of what Angel groups do today along in this next generation of angel funding.

Consolidation. In any “hot” industry with relatively low barriers to entry like creating a donation-based crowdfunding portal, an initial proliferation of market entrants occurs followed by market share consolidation, either via M&A activity or other means. By the end of this year, there will be an estimated 500+ crowdfunding platforms worldwide, which is up 60% from 2011, driven by the explosion of equity-based portals after the passage of the JOBS Act. One key reason that there will be consolidation? Because the JOBS Act is likely to require equity based portals register with FINRA as broker dealers (disclosure: CircleUp supports that). Becoming a broker-dealer is a non-trivial process and not all of the portals will make it through.

Additionally, I expect there to be a flight to quality among crowdfunding portals which will kick-off a cycle that allows only the highest quality crowdfunding sites to thrive. Just as public market investors do not maintain 10 brokerage accounts, crowdfunding investors will not use 10 portals. Rather, a handful of portals will attract the highest quality deal flow, which will in turn attract a higher quantity and quality of investors. With more liquidity on the platform, this small handful of popular portals will be able to help companies get funded faster and with more experienced investors, which will in turn lead to more quality deal flow. Sound familiar? This virtuous (or vicious, depending on your perspective) cycle is similar to a lot of marketplace dynamics. When you book a restaurant reservation, where do you go? Open Table. Buy (or sell) something online? eBay or Amazon. That virtuous cycle is precisely why there are so many early entrants trying to get into the market now – and why I predict 2013 will be the year of consolidation, not the explosive growth so many others predict.

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Ryan, There is such a thing called CrowdFunding award / pre sell/ pre build which is extremely active and does not have to wait for SEC or any Angle VC. If government trust us to buy thousands of dollars worth of stocks ( I.e. FaceBooks ) or Lottery from any convenient store or gamble in Las Vegas without any issues , they should trust us to take a chance with CrowdFunding equity based . Now, we have a choice . To have negative predictions to set expectation and lose to over seas CrowdFunding portals ( Europ, Asia and south America …. and yes chines ) which are not regulated by same people that crushed IPO market in US ) or we get wise and make sure the 2.5 billion internet users can invest in US entrepreneurs, SMBs and Start ups . I hope Creativity, entrepreneurship are still welcome in USA.

Ryan’s comments are spot on and show the experience he has in operating a FINRA compliant private placement platform, which is quite different from most of the organizations who are the “Self Proclaimed” the equity CF experts before raising even $1 online. I agree with him that the SEC and FINRA will create rules that will dissuade many issuers from accessing capital via the CF exemption, which is why we have Reg D and the new allowance of private placement general solicitation.

Additionally since raising capital online or offline is not just about technology and pushing buttons, unless proposed CF portals have experienced the challenge of raising private capital, dealing with investors and post closing services, they do not know how much work it actually is, and this will be all about quality control. This is why FINRA compliant organizations like Circle Up have a distinct advantage over all others as its not about technology, its about really understanding the complexities of the capital raising process and having the prior experience with issuers and investors along the value chain.

I was re-reading this post and appreciate much of Ryan’s original predictions (shy of the consolidation prediction–not quite yet). And to yours, too true–all of the above, Mike.

I often have to grapple with (and sometimes am guilty of myself) the blind enthusiasm that the JOBS Act fueled in contrast to the regulations necessary (some, unfortunately) to slap some reality into the discussion that, at the end of the day, there are many details left out of the overall impact discussion that simply take time to hash out in DC, on Wall Street and Main Street.

I do wonder how BDs are looking at 2014 however. I suspect that with the added dealflow that CF will generate, BDs will certainly have tremendous opportunity, especially in the short term while SEC fine tunes and publishes rules on Title III.

Ryan, good points. While I agree with some, I’m more of a “cup half full” kind of person.

1) I believe consolidation will occur. If we review history of recent social technological advances and accounting for an acceleration of technology time to market, it took Prodigy, MindSpring, Earthlink about 10 years to consolidate during the AOL 1990′s ISP wars (does anyone remember GEnie?). While new combos are happening in about 5 years. Facebook vs MySpace, etc or eHarmony vs. Match.Com vs the 100 other flameouts, I believe the consolidation will happen much faster.

2) I also agree with differentiation will be key to survival of the new platforms. Our platform, A KickIn Crowd specializes in SPORTS and Health & Fitness based crowd funding, which Kickstarter prohibits and is now being used by several professional athletes http://www.akickincrowd.com.

Gary Glazer of RealNetworks said the internet small business motto, “Get Big FAST!”

3) I humbly disagree with your assessment of 2013′s shortcoming for Equity based crowd funding. I believe you underestimate the breadth and size of the offerings. No fault of your own, because there is no empirical historical statistical (did I get all of the words ending in “cal”?) data to prove such a theory. Only basing my view on the recent entrants in Reward based issues, I believe the issues surrounding Equity will be far larger than anyone can anticipate.

Ryan, thanks for putting the conversation out there. I hope we all have a great New Year!

Great article, especially the prediction about a flight to “high quality” crowd funding portals. Can you provide some insight on what you think makes a crowd funding site “high quality”? Is it just the quality of projects/businesses that are featured on its site? Would you say this flight will be led by the investors first?

Ryan, Here’s a unique business model just starting to get attention. Braeger Auto Finance Group of Milwaukee, WI has married crowdfunding with auto dealership financing. Investors provided funding to dealerships who offer non prime loans. Car buyers get financing they need and build their credit. It’s a win, win. win. Investors opt in at www.vroombank.com